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Hundreds of landlords duped into illegal tax avoidance schemes

Tax inquiries

Hundreds of landlords duped into illegal tax avoidance schemes

At least two companies offering what have been described as “magic solutions”, charging landlords as much as £100,000 each for setting up the tax avoidance schemes, could now cost these landlords their portfolios of properties.

As much as £100 million in tax avoidance could have disappeared before taxation expert Dan Neidle of Tax Policy Associates (TPA) “blew the whistle” on the schemes, bringing them to the attention of HMRC.

HMRC has now published guidance stating that the schemes, which relate to avoiding tax when transferring individually owned portfolios of properties into limited company ownership, do not work.

HMRC advice 

HMRC has advised that those landlords involved in the schemes should contact them without delay.

In November various tax avoidance schemes came under scrutiny through the exhaustive analyses by Tax Policy Associates (TPA). This action raised concerns for over 1,000 buy-to-let landlords. The potential fallout could be disastrous for those involved, including unintended tax liabilities and the risk of mortgage default. The revelations have prompted urgent discussions on seeking independent legal counsel and potential remedies.

Specialist tax firms are now discussing possibilities for remedies, exploring the feasibility of a court application to unwind the arrangements based on the grounds of mistake. If successful this could avert adverse tax penalties and legal consequences.

The schemes were targeted at buy-to-let landlords, claiming to minimise tax on rental income while avoiding the complexities of transferring properties to a corporate structure. They involved a landlord's declaration of a trust fund over their rental properties in favour of a newly incorporated company. 

Concerns have now been raised about the effectiveness of the trust's drafting, potentially leading to negative tax implications involving capital gains tax (CGT), inheritance tax (IHT), income tax, and stamp duty land tax (SDLT).

Discussions by experts about remedies

The discussions about remedies have revolved around potential professional negligence claims against scheme advisors. Alternatively, a court application by landlords involved, seeking to set aside some or all of the arrangements on the grounds of mistake, could be successful. 

If these remedies do prove successful, they could in theory - there are no guarantees with any of this - legally nullify the arrangement, or they could at least mitigate the tax consequences, providing a potentially quicker and less costly resolution than litigation.

Setting aside a transaction on the grounds of mistake was outlined in the Supreme Court decision in Pitt v Holt. This involves establishing a causative mistake and evaluating the seriousness of the mistake, and assessing the injustice of leaving the disposition uncorrected. Experts have said that if successful, this remedy could potentially reverse some or all of the looming tax liabilities, but they emphasise the need to seek expert advice on individual cases before proceeding.

Transferring to a limited company

Any landlords contemplating the transfer of rental properties to a limited company should avoid any scheme claiming to avoid tax liabilities. Legitimate tax specialists caution their clients against participating in these types of aggressive tax avoidance schemes for good reason. They emphasise their vulnerability to detection by HMRC's now much more effective anti-avoidance legislation. 

Unfortunately, many landlords taken in by these schemes’ advisors, and having implemented these schemes, now face substantial tax bills following the revelation of this misleading advice.

Dan Neidle of Tax Policy Associates is now renowned for uncovering illegal tax arrangements, one leading to the resignation of Nadhim Zahawi, recent chairman of the Conservative Party, for avoiding up to £5 million in tax. 

Mr Neidle argues that rather than delivering tax savings, the landlord schemes have resulted in doubled tax liabilities for unsuspecting landlords. The advice provided, or rather, mis-sold, has left numerous landlords facing unforeseen tax burdens, he says.

HMRC has said it will intensify its scrutiny of not only one the specific tax scheme offered by a well-known landlord advice provider, but also on other schemes promoted by the same firm. Despite the incorrect advice received from these non-tax-qualified professionals, it leaves landlords ultimately responsible for dealing with HMRC and settling any ensuing tax, penalties, and interest arising from HMRC’s investigations.

Landlords affected by this should consult with their accountants / tax advisors without delay.

See also:

Landlords double tax bills by taking poor advice - Accounting Web

Landlords caught up in CGT schemes need to mug up on the rules – LandlordZONE article

HMRC Spotlight notice, a warning notice (Spotlight 63)

Paying tax on rental property – HMRC guidance

The revelations - Tax Policy Associates - here and here

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